Wednesday, September 06, 2017

Repeal the Debt Ceiling. Now.


Congress is once again facing the possibility of stumbling into an economic catastrophe if it fails to raise the debt ceiling by the end of this month.

The debt ceiling authorizes the Treasury Department to borrow money (primarily by selling government bonds) up to a specified amount, in order to pay for obligations the government has already incurred through its passage of laws and appropriations bills. Once the ceiling is reached, the country cannot sell bonds to pay off monies owed by the government.  Since March of 2017, the Treasury has been using "extraordinary measures"--various accounting gimmicks--to pay the nation's bills. But it will run out of tricks by the beginning of October.

Congress raises the debt ceiling either by raising the absolute amount or by suspending the operation of the debt ceiling for a specified time. We are currently operating under a temporary debt limit suspension of a previous debt limit created in 2011.

Raising the debt ceiling does not appropriate new money. Rather, it allows the government to pay money that Congress has already appropriated, (and it allows the Treasury to pay creditors interest for any new debt issued).

Failing to raise the debt ceiling will not stop Congress from spending more money. Rather, it will cause the government to default on its debts. This will precipitate an economic crisis felt not only in this country but around the world.

In past years, the debt ceiling has been breached accidentally overnight or for a few hours. Most people didn't notice it. In this case, the breach would be quite public. The markets will quickly react. If the default continues for more than a day or so, the stock market will take a nose dive. The world economy will be thrown into panic. Enormous amounts of wealth will be destroyed as markets tumble. Eventually Congress will have to give in and raise the debt ceiling. When it does, it will be more expensive to borrow, because the United States will have to pay higher interests rates for the same amount of borrowing. Congress will also have undermined America's economic leadership, and the role of U.S. Treasury bonds as a cornerstone of the world economy.

Thus, failing to raise the debt ceiling is sheer idiocy, an unforced error of epic proportions. One would think that no politician in his or her right mind would threaten to refuse to raise the debt ceiling.

But that would underestimate the stupidity and venality of contemporary politicians. In the summer of 2011, Republicans held the debt ceiling hostage, precipitating the Debt Ceiling crisis of 2011. They tried again in the fall of 2013, but President Obama refused to budge, and eventually Republicans caved.

Today politicians of both parties still think that they can use the debt ceiling as leverage to achieve any number of  policies.  The madness continues. (I note that today Nancy Pelosi and Chuck Schumer have floated a proposal to fund Hurricane Harvey aid and raise the debt ceiling for only three months in order to keep the pressure on Republicans.)

There is a simple way to stop this reckless hostage taking. Simply repeal the debt ceiling, and allow the Treasury Department to borrow what it needs to pay the nation's bills. If you want to limit the government spending, do it through the appropriations process, where these decisions should be made.

Let me repeat: Don't raise the debt ceiling. Get rid of it altogether.

The vast majority of nations in the world do not have a debt ceiling and they get along just fine without it. Neither Canada, nor Great Britain, nor Germany, nor France have it. In fact, at last count only six other countries in the world have something like it, and even those countries tend to define it in ways that prevent it from being used as a political football. In fact, our own debt ceiling statute, which dates back only to 1917, was regularly raised without much incident for many years. But in recent years, our politics has gone haywire. In particular, because of the intransigence and brinkmanship of the Tea Party and the Freedom Caucus, Congress has been plunged into needless political crises over the debt ceiling.

Keeping the debt ceiling in the hopes that it will stop the growth of government is a fool's errand. We have had a debt ceiling for a century now and it has not had the desired effect. Using the debt ceiling is simply not a sensible approach to fiscal policy. Rather, it creates a temptation for politicians to engage in hostage taking and an opportunity for economic disaster if they miscalculate.

If we repealed the debt ceiling, on the other hand, nothing would happen. It would simply mean that we wouldn't have a bunch of crazy politicians threatening to crash the world economy every few years in order to score political points. Conversely, because we have a debt ceiling, we face hostage taking on a regular basis.

Because of our current level of political polarization, the debt ceiling probably won't be abolished until one party controls the White House and both branches of government. That is the case presently. Unfortunately, a collection of fools and radicals in the Republican Party are the very culprits who have been trying to use the debt ceiling to hold the economy hostage for the past six years.

It would be an act of political courage for Speaker Paul Ryan, Senate Majority Leader Mitch McConnell, and President Donald Trump to push for repeal, especially since McConnell in particular was a leading hostage taker in the 2011 debt ceiling crisis. (He famously called the debt ceiling "a hostage that's worth ransoming.") And President Trump--who spent most of his adult life trying to get out of paying his debts--is not the first person we should look to for either wise economic policy or political courage.

But now that Republicans control the government, Ryan and McConnell understand that the debt ceiling is too dangerous to be toyed with.  We must hope that they will work with Democrats to raise or suspend the debt ceiling for as long as possible, and without unnerving the markets.  But in the long run, the correct policy is to repeal the debt ceiling once and for all.

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